Buy Neo Material on rare earth uncertainty

Japan is one of the world’s biggest users of rare earth metals and a key customer of rare earth processor Neo Material Technologies Inc. So it is no surprise that Neo’s share price has nose-dived since the earthquake.

Paradigm Capital analyst Daniel Kim thinks this uncertainty creates a buying opportunity for Neo Material stock. His research suggests that there may be some temporary weakness in rare earth demand, but he does not think it will last more than a couple of months.

“We believe given the declining export quota environment from China, Japan, despite the earthquake, will continue to stockpile rare earths,” he wrote in a note.

Mr. Kim noted that most rare earth companies in Japan have not been affected by the earthquake and tsunami, though it has hit some of the downstream companies.He thinks any volume disruptions are largely offset by soaring rare earth prices, which passed US$100,000 per metric tonne for the first time in February.

Until the earthquake, Neo’s share price was on a spectacular run as China tightened its rare earth exports and prices increased. Mr. Kim noted that shares of other rare earth players fell after the earthquake and rebounded, but Neo is still lagging. He expects this to change, especially as he forecasts world demand for rare earths to exceed supply for the “foreseeable future.”

“Any disruption to rare earth volumes, and subsequently pricing, is only temporary. Should this have a negative impact on [Neo Material] shares, we would suggest picking up shares on any weakness,” he wrote.

He reiterated a “buy” rating on the stock and a $15.00-a-share price target, a whopping 88% premium to the current price. That is based on a multiple of 20 times his 2012 earnings estimate of US77¢ a share.